Economist Dork vs. Political Scientist Dork

Shep recently sent me a political quiz that is simple, yet insightful. It takes about 2 minutes to complete. When you’re done, it plots your political stance on a chart. It is well worth the minor time investment.

Once I divulged my political graph result, he sent me this… Greg Mankiw’s Blog. Greg Mankiw is an Economics professor at Ha-vard. Prof Mankiw talks about the challenges facing Treasury secretary Hank Paulson. Mankiw points out the fiscal crises we will inevitably face in the near future. There are definitely reasons to be concerned with America’s economic outlook.

But I do question one of his underlying assumptions.

One of Mr. Paulson's first briefings from the Treasury staff should be about what high taxes have done to the economies of Europe. According to research by Nobel laureate Edward Prescott and by economists Steven Davis and Magnus Henrekson, the high tax rates in Europe have reduced work effort and distorted the industrial mix. The Davis-Henrekson study reports that a tax increase of 12.8 percentage points (a change of one standard deviation) reduces work for an average adult by 122 hours per year.

As to the solely economic aspects of Europe’s high tax rates, I am not going to question Professor Mankiw, who obviously knows more than I do. But you cannot ignore the reality that reasonable people (could/do) disagree about how much work per year is “optimal.” Life, and decisions about how to live it, should not be reduced to mathematical equations. I would argue that the “European economic model,” while less efficient is not necessarily “worse” than the American version. It is just different. Ranking the two will depend upon personal preferences… how much is your freetime worth?

Like most aspects of politics and life, the best course of action is probably somewhere in the middle. Europeans could do better for themselves by working a little more and taxing themselves less. And Americans could improve their quality of life by slowing down and enjoying the fruits of their productive efforts; taking the time to smell the perverbial roses. And while the Bush tax cuts “appear” to have stimulated the economy, America needs to realize that markets are not very good at being socially responsible.

Unfortunately, you cannot always accurately quantify life’s pleasures. Ultimately then, setting tax rates is an exercise in policy as well as economics. Societies (are/should be) judged based on the way they treat those at the bottom. Effiecency is a fine goal, but we should not pursue it blindly.